Keep calm and call on Stevens

When it comes to questions about the economy, the RBA governor is the man to ask. Glenn Stevens may be calm and measured in his responses, but he is willing to highlight the complexity of our economy. He's certainly not afraid to drop some nice truth bombs, writes Greg Jericho.

Stevens presents himself almost exactly as you would hope a central banker would. His slow, carefully spoken and seemingly carefully measured tone suggests the air of a man who is unlikely to lose his head when all about are losing theirs.

But within his measured tones lay some nice truth bombs for both politicians and the media.

There are not a lot of laughs in the Economic Standing Committee, but there was one delivered by Grace Lanspeary, a student from UC High School Kaleen in the ACT.

In recent times, whenever the RBA governor has appeared before the Economic Committee, a few high school students have been invited along to ask him questions. Ms Lanspeary prefaced her question by noting that she was studying politics, and stated:

"My question to you today, Governor Stevens, will be political."

The laughs from those in the committee room reflected that a good many of the questions directed at Governor Stevens were politically, rather than economically, driven. Both sides were guilty. The questions essentially ranged from "Could you tell us how good the economy is going and thus why the Government is so great?" to "Governor, could you please take this opportunity to dump a bucket of excrement on Labor's economic management?"

Stevens for example was asked about the Government's decision to dump the pledge to return to surplus, and whether that would mean interest rates would go up.

His response noted that there is a bit more to life than just whether the budget is in surplus or deficit - the key issue is why the budget is in that state:

If they are running a larger deficit or smaller surplus because the economy is weaker, revenues are less, and some of their spending obligations for unemployment and so on go up, that is telling you a different message about the economy.

The RBA governor is never one to advertise changes to interest rates in advance, but it was his manner of explaining the process that most impressed.

In response to a question by Liberal MP Kelly O'Dwyer, Stevens answered that that if the Government had kept cutting or raising taxes to achieve the budget surplus, given the current state of the economy the bank would likely have needed to consider lowering rates. Crucially he noted that:

There would be nothing we could do, though, with interest rates, to offset that very short-term contraction [of spending cuts and tax rises], because interest rates do not work that quickly. So we would end up with a weaker economy.

So a budget surplus and lower interest rates would have us with a "weaker economy". Not your usual rhetoric.

Stevens even noted that in his view, whether or not expenditure or cuts mean there will be a surplus this year or the next "is not actually a question of major importance, in all honesty. The medium-term is the important bit."

The medium term goes to the structural deficit problem - due to, among other things, the tax cuts promised by Howard and Costello and foolishly adopted by Rudd and Swan in the 2007 election campaign, and the general belief held for too long that the boom tax revenue periods of the mid-2000s would keep going.

It's an issue neither side of politics seems to desire to spend too much time discussing.

Governor Stevens' desire to talk of complexity was also exhibited with respect to mortgage rates. Liberal MP Scott Buchholz asked the governor, in reference to the spread of mortgage rate to cash rate, when "Australian banking consumers could expect a better deal":

Since 2008 domestic deposits have grown in importance while the previous cheap short-term debt has declined. This happened because the GFC hit the short-term debt market the hardest. The price of that debt has now returned to pre-GFC levels, but it makes up less of the banks' funding now than it did then.

And what has happened in that time to the cost to banks of getting your term-deposit business?

Yep, it has gone up - zoomed up in 2009-10, and has now stabilised at a place about 170 basis points above where it was for most of the last half of the Howard government years. Lenders are doing well because banks are fighting for their business.

The problem is if banks are paying well over the cash rate for deposits, they'll have to charge well over it when giving out mortgages.

The key issue is the gap between mortgage rates and term deposits. If that is increasing then you can make a good case that gouging is occurring.

And yet here we see that while post-GFC there has been a lot of volatility - the spread between mortgages and deposits is now less than what was observed during the Howard government. To get back to the Howard government average either mortgages would have to rise, or deposit rates would have to fall. Something I doubt Mr Buchholz wants to see happen.

That doesn't mean there isn't room for banks to cut mortgage rates further, but bear in mind that if they do they'll also likely cut the rates they offer for deposits.

This exchange between Stevens and Buchholz was interesting given that earlier in the morning, high school student Ricky Kelly from Gungahlin College had asked the governor:

If interest rates decrease over the next six to 12 months, how will this affect the savings and income of non-mortgage holders?

The governor replied:

That is a very good question and it is one that should be asked more often in the public debate about interest rates.

He ended by noting that "people without mortgages outnumber those who have them by two to one, so it is a thing we need to always remember".

It perhaps is why when answering Mr Buchholz's question regarding mortgage rates, he concluded, "I do think there is a bit of a tendency in the media to whip up a bit more hysteria here than we really need."

Governor Stevens is not a great one for hysteria, but he is certainly the go-to person when you want some calm, reason and understanding of the complexities of the economy.

Greg Jericho writes weekly for The Drum. His blog can be found here. View his full profile here.